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DGI plc
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==Valuation== '''DCF Analysis''' Given the early-stage nature of its operations, lack of current profits but significant future potential, Align Research considers that the best way to put a valuation on DGI PLC is via an appropriately risked discounted cash flow model. Working with management and considering wider industry sources Align Research has put together a DCF model with a four-year time horizon out to 2026. Align Research also adds a terminal value in order to establish an appropriate value for the shares of DGI PLC. Align Research's key assumptions are discussed below. '''Revenues''' As the company’s range of projects with various partners continues to progress, Align Research is expecting significant revenue growth from product sales over the time horizon of its forecast model. This is expected to be mainly driven by use of EDT by the UK Government and the related sales of electric motors and inverters and also revenues from the integration of the systems into the government vehicles. In 2025, Align Research is also expecting further EDT sales from the company’s relationship with the un-named Tier 1 supplier to the commercial vehicle sector. Given the earlier stage nature of the business segment, Align Research is expecting only minimal sales of sodium-ion batteries over the four-year forecast period but see significant longer term potential. Align Research also expects that product sales will be complemented by modest income from licences, royalties and grants. '''Profits''' Align Research sees the business entering profitability in 2024, with profits then jumping significantly in 2025. This can be a highly profitable business, with the expectation that motor and inverter sales will deliver gross margins in the high 40% level once scale is achieved. Integration of the units meanwhile is expected to see margins in the mid to high 60% level. For the EDT sales to the Tier 1 commercial vehicle supplier, Align Research is looking at gross margins in the mid 30s. Overall, Align Research is expecting EBITDA margins to settle at 42% by the end of the forecast period. Align Research conservatively assumes that tax will begin to be paid in 2024 as the company becomes profitable although note that Path has c.£6.2 million of trading losses. Align Research's headline P&L forecasts are presented below '''DCF calculation''' To calculate the free cash flow to the firm, Align Research makes various assumptions regarding capex, depreciation and amortisation and changes in working capital then factor them into the model. It should be pointed out that Align Research's revenue forecasts assume that the projects with specific customers are successful and move onto their next phases in a timely manner. Any delays or unsuccessful conversions or would materially affect Align Research's numbers. However, to account for this, Align Research places an appropriate discount rate in its valuation. Align Research has chosen to use a discount figure of 20% in its base case model but also present a valuation matrix with other figures used. After discounting the free cash flows for the five-year time period, Align Research also adds in a terminal value. For this, Align Research uses a terminal growth rate of 10%, which it believes is reasonable given the growth rates being predicted in the company’s target markets and given the potential for significant growth from a small base. From this, Align Research takes away the present value of predicted costs at the group level (assuming corporate costs growth by 5% per annum) and add in the net cash position of £6.1 million following the completion of the reverse takeover. Align Research values the company on a fully diluted basis, assuming that the deferred consideration shares are issued and that all outstanding warrants and options are exercised, adding in the income from those warrants and options. The findings of Align Research's DCF model are presented in the table below. '''Valuation''' Align Research's DCF analysis shows that DGI PLC’s business model looks to be potentially highly profitable. Align Research sees the significant forecast scale up in product sales from 2025 leading to annual free cash flows almost approaching the value of the price that Path Investments paid for the business, within just three years. Align Research notes that a high proportion of the valuation comes from the terminal value NPV. But, as mentioned, Align Research believes that this is sensible given the long-term potential of the company’s technologies and forecast growth in its target markets. It could even be conservative given that Align Research has attributed minimal revenues to the EBT side of the business. With a total value to equity holders of £156.43 million, Align Research calculates a fair value of 1.192p per share after dividing by the 13.125 billion fully diluted share capital. Align Research chooses to set this as its base case target price for the company, implying 138% upside from the subscription price of 0.5p. As Align Research's valuation is highly sensitive to the discount factor and growth rate assumed in the model, below Align Research presents a matrix of valuations if those two factors are changed. '''Peer analysis''' An analysis of DGI PLC’s peer group provides limited useful information for a comparable valuation using earnings multiples given that most companies within it (along with DG) remain loss making. However, to illustrate the kind of valuations currently being attributed to companies in the sector Align Research feels it is worth looking at some select companies and recent transactions within the wider electric vehicle and green energy storage industries. '''Tesla Inc.''' – market leading electric vehicle company and poster child of the industry Tesla (TSLA) delivered over 936,172 EVs to customers in 2021. Revenues for the year were $53.8 billion with a net profit of $5.64 billion. The company is currently being valued at $1.11 trillion, a multiple of 197 times last year’s earnings. '''Rivian Automotive''' – electric vehicle business Rivian (RIVN) makes sport utility vehicles and pickup trucks. It listed on the NASDAQ in November 2021 raising $13.7 billion at $78 a share, with the current price of $50.24 valuing the business at $45.2 billion. For the year to December 2021 net losses were $4.69 billion on revenues of just $55 million as the company began production and deliveries of three vehicles. '''Nikola Corporation''' – Nikola (NKLA) is a designer and manufacturer of zero-emission battery-electric and hydrogen-electric vehicles, electric vehicle drivetrains, vehicle components, energy storage systems and hydrogen station infrastructure. The company is currently valued at $4.47 billion on NASDAQ and in 2021 made a net loss of $690 million on zero revenues. '''Arrival Limited / CIIG Merger Corp'''. - In March 2021 Arrival (ARVL), listed on NASDAQ following a $5.4 billion merger with CIIG Merger Corp. Arrival is producing EVs competitive in price with fossil fuel alternatives and substantially lower than comparable EVs. It has developed a new method of designing and producing zero-emission vehicles using its proprietary hardware, software and robotics technologies and low cost microfactories. The current market cap is $2.375 billion, with results for 2021 expected to show a loss of €1.087 to €1.096 billion. '''XL Hybrids, Inc. / Pivotal Investment Corp II''' – in December 2020 the $1 billion merger was completed between vehicle electrification solutions business XL Hybrids and acquisition vehicle Pivotal Investment Corp II. XL Fleet is a leading provider of vehicle electrification solutions for commercial and municipal fleets in North America, with more than 140 million miles driven by customers. XL Fleet’s electric drive systems can increase fuel economy up to 25-50% and reduce carbon dioxide emissions up to 20-33%. Revenues were $15.6 million for 2021, down from $20.3 million, with an adjusted EBITDA loss of $50 million compared to a loss of $14.7 million for 2020. '''National Electric Vehicle Sweden / Mini Minor''' – in June 2020 Mini Minor, a subsidiary of Chinese real estate giant Evergrande, bought the remaining 17.6% of equity in National Electric Vehicle Sweden (NEVS) for c.$380 million, valuing NEVS at c.$2.2 billion at the time. NEVS is a manufacturer of electric vehicles and vehicle components. '''Hankook AtlasBx Co / Hankook Technology Group''' – in April 2021 the merger was completed between Hankook Technology Group, the holding company of South Korean tire maker Hankook Tire & Technology, with battery-making subsidiary Hankook AtlasBX Co. The deal was valued at c.£67.5 million. Hankook AtlasBx produces passenger car and light truck lead-acid batteries, was the first in Korea to unveil a maintenance free battery and is transitioning into a smart energy solution company. Align Research's peer analysis demonstrates that that while many companies in the industry remain loss making, investors are willing to put huge valuations on businesses which they see have significant growth potential. This is still the case once they start making consistent profits, with Tesla being a case in point being on a huge annualised PE multiple, as described above. Align Research notes that if DGI PLC meets its net income forecast for 2026 that on its valuation it will be on an earnings multiple of little over 2 times. For illustrative purposes only, applying Tesla’s multiple to Align Research's 2026 forecasts for DGI PLC implies a valuation of £5.42 billion. While that is more a reflection of the high valuation of Tesla, it does demonstrate what investors are willing to pay for access to growth stocks in the EV/alternative energy technology industries. '''Conclusion''' DGI PLC has made significant progress to date on the development of its novel technologies. This has been reflected in the sizeable grant funding having been received, along with the company attracting a range of partners who are looking to apply its technologies to their own activities. Progress is being made in the context of a highly favourable political, social and financial environment for emissions reducing technologies, all of which set the scene nicely for growth in the coming years. Following the reverse takeover and associated fund raises DGI PLC now finds itself in a strong position to finance the product trials, testing and further development required to begin earning significant revenues from its products. The relationship with the Ministry of Defence is key to the current investment case given that the associated forecast revenues make up a large chunk of Align Research's valuation. Align Research will be watching closely for further progress reports on this deal but given the large range of applications of the company’s technologies Align Research also expects further opportunities to reveal themselves over the coming months. Noting the risks to the company’s operations and its valuation model, Align Research initiates coverage of DGI PLC with a target price of 1.192p and a stance of Conviction Buy.
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